What Europe’s Reopening Means for Economic Growth

Overall European Rebound Outlook

• Goldman Sachs projects a strong economic rebound across Europe for 2021, driven by the ongoing vaccine rollout unlocking significant pent-up demand in the summer.
• The near-term outlook remains challenging due to elevated infection rates and lingering restrictions.
• The UK is identified as the clearest case for recovery, with infections falling and restrictions scheduled for removal by the end of June.

Growth Forecasts

• United Kingdom: 2021 annual GDP growth is forecast at 7.1%, significantly exceeding consensus estimates; a strong rebound is expected in Q2.
• Euro Area: 2021 annual GDP growth is forecast at 5.1%, also above consensus, with sharp bounces anticipated in Q2 and Q3.
• The Euro Area reopening is projected to lag the UK by one to two months due to rising infections in some regions and a slower vaccine rollout.

Regional Divergence Within the Euro Area

• Germany vs. Southern Europe: Germany is expected to return to pre-pandemic activity levels by Q3 2021, roughly six months earlier than Italy and Spain.
• Key Drivers for Germany's Lead:
  • Economic activity relies less on COVID-sensitive sectors and more on the strong global industrial cycle.
  • Germany implemented more substantial fiscal support compared to southern European counterparts.
  • The reopening phase has already commenced in Germany, whereas countries like Italy have recently tightened restrictions.

Sectoral Performance

• Manufacturing: Already near pre-pandemic levels, supported by restrictions that impact this sector less than services and a robust global industrial cycle.
• Services: Currently deeply depressed, particularly in COVID-sensitive sub-sectors like arts, entertainment, and travel, which face specific restrictions.
• Forward-looking indicators in the services sector are rising, suggesting a strong rebound once restrictions are lifted.

Risk Assessment

• Downside Risks:
  • Near-term growth faces downward pressure from new, more infectious virus strains.
  • The possibility of a vaccine rollout slower than anticipated.
  • A delayed reopening timeline could push growth later into the year rather than destroying it entirely, assuming herd immunity is reached.
• Upside Risks:
  • A rapid unwinding of excess household savings could boost consumption significantly beyond forecasts.
  • Excess Savings Magnitude: Estimated at 15% of GDP in the Euro Area and nearly 30% of GDP in the UK.